Medicare Soon Won’t Pay Hospitals for Errors

Private payers may be encouraged to adopt similiar policies of no pay for “preventable errors”

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CEO SUMMARY: CMS issued new rules, effective in October 2008, that it will no longer pay the extra cost of treating patients after preventable errors, infections, or injuries that occur in hospitals. It continues Medicare’s transformation from a “passive payer simply processing claims” to an “active purchaser with a stake in quality and efficiency.” Many experts believe that private payers will follow Medicare’s lead and also cease to reimburse for conditions related to preventable errors.

SAYING IT WILL NO LONGER PAY for the extra costs of treating preventable errors and injuries that occur in hospitals, the federal Centers for Medicare & Medicaid Services (CMS) is setting a new standard of accountability in healthcare.

In adopting this new policy, Medicare is making a significant policy shift. It is raising the profile of medical errors to a higher level, by making hospitals directly responsible for the financial consequences of “preventable errors.”

At least eight conditions are included in the new rule book published by CMS late last month. The rules are in response to a 2005 law passed by Congress and will take effect in October 2008.

After implementation of the new rules, Medicare will no longer reimburse hospitals for treatment that resulted from nosocomial infections, surgeries performed to retrieve objects—including sponges or instruments—left in a patient, reactions when transfusion patients get the wrong blood type, bedsores that develop during hospitalization, and injuries from a fall sustained in the hospital.

Upon initial implementation of the new rules, hospital laboratories will be directly involved in how hospitals respond, particularly in programs to improve protocols for use of blood products. It is likely that hospitals will increase testing of newly-admitted patients to identify if there is an existing infection and, if so, what type of infection it is.

Long-Term Implications

However, these short term consequences and their impact on hospital laboratories are only a small part of this story. THE DARK REPORT believes the new Medicare policy will have long-term policy implications in healthcare. After all, Medicare’s coverage and reimbursement guidelines tend to be adopted by private payers. Thus, Medicare’s declaration that it will not reimburse hospitals for preventable errors sets the stage for private payers to adopt the same policy.

Further, the new Medicare rules are implementation of Medicare’s evolving stance as a purchaser of healthcare. “We are transforming Medicare from a passive payer simply processing claims to an active purchaser with a stake in quality and efficiency [TDR’s emphasis],” said Tom Valuck, M.D., J.D., who is a Senior Advisor to CMS and Director, Special Program Office of Value-Based Purchasing. Valuck was discussing the new rules on preventable errors.

Downstream Benefits

Valuck observed that downstream savings would result if hospitals are able to significantly reduce the number and cost of complications. “You could have less home health care, less nursing home care and less ambulatory service care, as well as less physician follow-up,” he observed.

Valuck also recognized how Medicare frequently influences private payers. He specifically identified HealthPartners of Minneapolis, Minnesota as already having such a policy. Instituted in 2005, HealthPartners doesn’t pay for “never events” or clear medical mistakes. (See sidebar on page 15.)

Private payers have multiple incentives to adopt policies similar to the new Medicare rules and HealthPartners. Some of our readers will point out that, by denying payment for conditions associated with preventable errors, private payers stand to benefit financially by reducing the amount of money paid out for claims. Certainly those financial consequences will be considered as private payers establish policies on non-payment for avoidable errors.

Patient Expectations

However, another motivation is likely to override economics: the public perception about whether private payers are willing to “take a stand” on preventable errors. A policy of not paying providers for preventable errors or “never events” sends a powerful signal to employers (who select plans and pay the premiums) and patients. It is a statement that the insurance company is committed to raising the quality of care and supporting provider’s efforts to reduce and eliminate medical errors.

Take this point from the opposite perspective, with a patient asking “why does my insurance company reimburse (reward) my hospital and doctors when they fail to follow established guidelines in my treatment—and Medicare and other insurance plans won’t pay for these same types of medical errors?”

By adopting this policy, Medicare is establishing a new precedent and paradigm. It won’t take long for patients to develop a new expectation about the care they receive from hospitals and physicians. Medicare is quietly in the process of raising the expectation of patients about the quality of healthcare provided to them.

Nosocomial Infections

Further, among the eight conditions covered by Medicare’s new rules, the inclusion of nosocomial infections signals an escalation in the effort to reduce hospital-acquired infections. Although CMS has provided an estimate of $20 million in annual savings from the new rules, it is estimated that 2 million patients suffer from hospital infections every year and nearly 100,000 of them die. Costs associated with hospital-acquired infections are estimated to total as much as $27.5 billion annually.

CMS’s move to stop paying for errors raises some interesting questions for pathologists, lab directors, and other providers. First, does the new rule mean that physicians and hospitals will order more laboratory tests for each patient upon admission? If so, the hospital’s cost for Medicare patients will increase, although the DRG reimbursement is a flat fee. Interestingly, the trend to test all newly-admitted patients for MRSA infections is already gaining momentum and is a useful part of infection control programs at hospitals which have already adopted this policy.

Second, there will be intensified efforts to improve how blood products are ordered, processed, and administered. This will directly encourage more laboratories to begin using process improvement techniques, including Lean and Six Sigma, since the goal is zero adverse events.

Third, Medicare now posts information about the performance of hospitals on its Web site. As it gathers data on preventable error rates by individual hospitals, CMS is likely to make that data accessible to the public within a few years.

Strategic Implications

THE DARK REPORT suggests that laboratory directors and pathologists view this new policy as a development with both short-term and long-term strategic implications for their laboratories and hospitals. The decision by an influential payer like Medicare to cease paying providers for conditions related to preventable errors marks a major escalation in the patient safety trend.

Remember, it was only in the early years of this decade that patient safety became a priority that required providers to establish programs with measurable goals in such areas as patient identification and nosocomial infections. Next, Medicare and certain private payers began to institute pay for performance programs and collect specific data on outcomes. Now, Medicare is ceasing payment for conditions directly linked to preventable errors.

Changing Expectations

This step-by-step escalation of the patient safety trend was predicted by THE DARK REPORT about the time that the Leapfrog Group publicly announced its first initiatives to improve healthcare. (See TDR, January 28, 2002.) Policy makers, employers, CMS, accrediting bodies and private payers have instituted new policies and requirements. Publicity about these developments has educated consumers and raised their expectations. Labs should be prepared to serve the higher expectations of today’s healthcare consumer.

Minnesota’s Efforts on Patient Safety Support HealthPartners’ 2005 Policy on “Never Events”

HOSPITALS IN MINNESOTA have been at the forefront of the patient safety movement. HealthPartner’s policy on avoidable errors is consistent with the statewide effort to improve patient safety.

Taken directly from HealthPartners’ Web site, here are the key points on its hospital payment policy for medical errors:

On Jan. 1, 2005, HealthPartners implemented a policy that withholds payment to hospitals for extremely rare medical errors identified by the National Quality Forum as things that should never happen to a patient. These events, called “never events” include errors such as surgery performed on the wrong body part or on the wrong patient, or leaving a foreign object in a patient after surgery. We believe that patients should never pay for “never events.”

The Minnesota Hospital Association and its member hospitals have been leaders in advancing patient safety in Minnesota. They led the way in establishing pioneering legislation on “never events.” The new policy builds on that legislation by stopping payment to a hospital and does not affect individual physicians.

We applaud the hospitals that already waive costs associated with never events and will continue to work with our hospital partners to ensure that this is the case for every patient, every time.

Answers to Frequently Asked Questions

What are “never events”?

The National Quality Forum, a nonprofit national coalition of physicians, hospitals, businesses and policy-makers, has identified 27 events as occurrences that should never happen in a hospital and can be prevented. They include surgical events such as performing the wrong surgical procedure, product or device events such as contaminated drugs or devices and criminal events such as abduction of a patient. See a complete list of “never events.” More information can be found on the NQF Web site.

What is HealthPartners policy?

On Jan. 1, 2005, HealthPartners implemented a policy that stops payment to hospitals for “never events”. The policy states that:

  • HealthPartners will not pay for services associated with a never event or permit providers to bill members.
  • If a provider bills HealthPartners or a member, the provider must notify HealthPartners.

Do hospitals already waive charges related to “never events?”

Some hospitals already waive charges related to “never events.” The Minnesota Hospital Association and its member hospitals deserve credit for leadership in advancing safety initiatives in Minnesota. They lead the way in sponsoring the “never events” legislation. It is through a partnership with hospitals that we can ensure that patients in Minnesota experience the safest care in the country.

Won’t this lead HealthPartners to not pay for other medical errors?

This policy applies to hospitals only and is limited to 27 “never events.” It is based on state law that is supported by Minnesota hospitals and it reflects standards established by a national coalition on heath care quality. HealthPartners policies will continue to be consistent with state and national quality standards. (Statements are at:

The noteworthy aspect of HealthPartner’s policy on non-payment for “never events” is that it is compatible with statewide efforts in Minnesota to improve patient safety. It is also based on widely-accepted national standards.


“To Err Is Human” Contributor Says Policy is Wake-up Call

NEWS THAT MEDICARE WILL NO LONGER PAY hospitals for “conditions that could reasonably have been prevented” is an overdue wake-up call for American hospitals, according to Lucian Leape, M.D., an expert in healthcare safety and hospital infections.

Leape is a member of the Institute of Medicine (IOM) committee that issued the report, “To Err is Human: Building a Safer Health System,” the landmark 2000 report that estimated between 44,000 and 98,000 patients die in hospitals each year as a result of medical errors that could have been prevented. He is also a Professor at Harvard Medical School.

Writing in an article in The Boston Globe, Leape observed that CMS is simply reflecting the rising indignation among members of the public about the high rate of harm they experience when hospitalized.

“Since our Institute of Medicine committee issued the report “To Err is Human” eight years ago, patient safety leaders have been calling on hospitals to get serious about safety, to make a commitment to eliminating preventable injuries, and to implement known safe practices that will prevent them,” Leape wrote. “Some have. Most have not. It was as if the safety folks were speaking a foreign language. Now the hospitals are being spoken to by people with authority and in a language they understand: the language of money.

“Hospitals have had the opportunity for some time to help their patients and save money by implementing a number of proven safe practices—bar coding of medications, computerized ordering, prevention of blood stream and ventilator-associated infections, to name a few—and most have ducked it. The ‘business case’ for safety has been well-established. Now it is the payers, not the hospitals, who will save the money— and, if we’re lucky, the public—in the unlikely event that savings get passed on in reduced premiums,” concluded Leape.



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